2022-23 Draft Budget Appears Promising for Crisis-Hit Bourse

The budget draft seems advantageous for the bourse in six ways, according to a review by the Securities and Exchange News Agency.  

Concerns about a possibility of higher prices of feedstock for petrochemical companies eased after it was reported that the government would continue with this year’s price list for feedstock that have a considerable bearing on margins of petrochemical firms and by extension on the share prices.

If so, this would potentially boost the margin for big petrochemical export companies if commodity prices increase in global markets and/or forex rates rise in the domestic currency market, which has been the case for years.

While the government has projected higher income from mining royalties from mineral companies, it does not plan to increase royalty rates for next year. The higher income projection is driven by the presumption about increase in prices of minerals and elevated sales by mineral companies.   

A royalty is a fee that is imposed by governments on either the amount of minerals produced at a mine or the revenue or profit generated by the minerals sold.

Stock Stabilization Fund

The government for the first time has decided in the proposed budget to allocate 1% of the resources of the National Development Fund of Iran, the sovereign wealth fund, to the Capital Market Stabilization Fund. The CMSF is designed to help resolve the systemic credit crunch in the bourse.

In the same vein, the government plans to channel revenue from tax on stock trade next year into the CMSF estimated at 100 trillion rials ($345 million).

Likewise, the government has cut its revenues projection from bonds. Unofficial reports indicate that the government plans to generate 1,000 trillion rials ($3.5 billion) from selling debt. This would be a massive 45% lower on this year’s number. The debt market is seen by many as a rival to the stock market as it has reportedly drained much of the stock market liquidity.

Budgetary numbers show the government has also reduced tax it wants to collect from manufactures next year. Granting tax breaks can and will lift the fortunes of a big number of listed companies.

Currency Policies

The government’s currency policy is also expected to impact the performance of listed companies come March. Increase in the official forex parity rates is among policies that should bolster the appeal of listed banks and their shares.

According to SENA, the government has set the parity exchange rates for the US dollar at 230,000 rials or equivalent in other currencies. That is more than double the parity rates for this year.

Parity rates are used by lenders as the basis for their financial statements.  

Low currency rates particularly impact the performance of banks listed with the stock market because their forex assets are thus undervalued and do not reflect the real picture, senior bankers have often complained.

In the draft budget there also is no mention of subsidized currency for importing basic goods. This means that the highly controversial and costly currency subsidy policy has been shunned in its entirety. However, the impact of such a risky move on the already high and rising consumer prices remains to be seen.

In past three years, the government sold subsidized currency for importing basic goods ($1=42,000 rials). This rate is almost an eighth of the real prices in the open market.

Cheap currency is sourced from oil exports and used only for importing food and basic goods to avoid unaffordable price hikes in food and raw materials.

But the policy is riddled with holes and regularly censured by academia and independent economists who claim the subsidy schemes are costly and infested with corruption and fraud.